In Ukraine, strife makes it nobody's business

Once a major emerging market, the restive nation finds investment drying up as financial losses mount

Jake Rudnitsky

MOSCOW — For Fyodor Bagnenko, 29, a fixed-income trader at Dragon Capital in Ukraine, selling bonds has become a lonely business.

From his office in central Kiev — about 20 minutes from the barricades on Independence Square that were the epicenter of protests that triggered the worst crisis between Russia and the West since the Cold War — he would trade more than $20 million of bonds a day last year. Since the revolution, there have been days where he couldn't close a single deal as trading in Ukrainian financial assets dried up.

"We've had days where the market's dropped five points or more and not a buyer in sight," he said earlier this month. "People have gotten whiplash, with the market jumping from complete indecision to frantic action, with the whole world trying to buy, or sell, simultaneously."

Not long ago, Ukraine was one of the hottest spots in emerging markets, posting returns of 24 percent on its dollar-denominated notes in 2012 and luring foreign firms led by Franklin Resources. Those returns turned negative last year as the tug of war between Russian President Vladimir Putin and the West for control of Ukraine began to take shape amid the protests.

The value of stocks traded on the Ukrainian Exchange has dropped 27 percent this year to 970 million hryvnia ($91 million), according to data on the bourse's website. The benchmark equity gauge is up 9.3 percent over the past year after tumbling 69 percent the previous two years.

Regulated corporate-bond trading slumped to 111 million hryvnia, about a quarter of the volume from the same period of last year, while trade in local-currency government bonds amounted to 27 million hryvnia, the data show.

The price of Ukraine's 2023 dollar bond swung more than 2 percent on one in every four trading days this year, compared with about one in 17 days last year, according to data compiled by Bloomberg.

"Eight years at Dragon and I've never had to deal with this level of stress before," Bagenko said.

Franklin Templeton, whose $190 billion global bond group is overseen by Michael Hasenstab, has boosted holdings of Ukrainian government bonds to $7.3 billion, according to data from the asset manager's most recent filings compiled by Bloomberg.

"The Templeton Global Bond group has the size to make what may seem like overall large investments in a single country," Adnan Abdel-Razzak, a Dubai-based spokesman for the firm, said by e-mail Monday. He declined to comment on the company's view on its Ukraine investment or its latest holdings.

While the burning piles of tires have been extinguished in Kiev and snipers no longer target protesters from rooftops, Bagnenko is continuing to work against a backdrop of waning investor sentiment that underscores his country's economic and political fragility. Ukraine's new leaders are lobbying for aid from the International Monetary Fund, the European Union and the U.S.

Ukraine, which has $10 billion in foreign debt payments to make this year, has seen its currency reserves dwindle by about 50 percent over the last two years to $15.4 billion on Feb. 28.

Daily bond moves will prove hard to assess until the country's political environment stabilizes, according to Simon Quijano-Evans, the London-based head of emerging-market research at Commerzbank.

"We can't talk about short-term gains on bonds for whatever reason," Quijano-Evans said. "The recent history of Ukrainian bonds has been a roller-coaster ride that is reflective of a non-functioning economic and political backdrop."

Bagnenko said he supported the ouster of President Viktor Yanukovych, who fled to Russia after more than 100 people died around Kiev's Maidan, or Independence Square, last month. He and his colleagues at Dragon Capital went through the barricades on Khreshchatyk Street to show their support for the protesters who have camped in a makeshift tent city since November.

"There were days of trading all day in a market in free- fall, and then heading out to Maidan to show solidarity with the protesters at night," Bagnenko said. "I'd come home smelling of smoke from the camp fires, only to go to sleep and start it all again."